China in Africa: The Real Story

The head of the U.S. Export-Import Bank, Fred Hochberg, has responded in an open letter (November 4, 2011) to suggestions made by Stephen Hayes, president of the Corporate Council on Africa in his November 1, 2011 testimony before the Senate Foreign Relations Committee that we could do better in supporting our companies' business efforts in Africa. I've just stumbled on this while looking (in vain) for data on the terms of loans for specific transactions that U.S. Ex-Im Bank has supported.

While I appreciate Hochberg's valient defense of his bank's performance in Africa, his characterization of Chinese large infrastructure transactions in Africa as "subsidized by the Chinese government ... at every level" is simply incorrect.

Hochberg mixes up apples and oranges. The large infrastructure transactions that are secured through commodity exports to China (not the same as "secured through resources for Chinese state owned companies") are not concessional. China Eximbank does have a small subset of concessional loans at fixed interest rates of 2 or 3 percent and repayment over 20 years. This interest rate is subsidized, but these are not the loans that finance the large, resource-secured transactions. Worldwide, between 1995 and 2009, China Eximbank committed $11 billion in concessional loans, total, whereas its commitments of non-concessional credits to Angola alone came to $10 billion during that period.

Hochberg states that his bank would need to provide "taxpayer subsidized loans if we were to compete toe to toe with the financing being provided by the Chinese." But this isn't exactly true, as we can see if we look at the rates for U.S. Ex-Im Bank's loans.

Forgive me if I get a bit technical now. U.S. Ex-Im Bank's fixed rates (CIRR) for loans in early November 2011 ranged from 1.47 percent to 3.35 percent depending on the term of the loan (repayment period). But the U.S. Ex-Im Bank's major business involves providing guarantees or "cover" for private bank loans. Quoting U.S. Ex-Im Bank: "Generally, a floating rate pure cover interest rate will be based on LIBOR [London Interbank Offered Rate] and have a spread in the range of 0 to 100 basis points (for larger transactions) or 20 to 400 basis points (for smaller transactions)."

One hundred basis points = 1 percent. So our Ex-Im Bank will guarantee floating rate loans based on LIBOR plus a margin (spread) of 0 to 4 percent. Similarly, China Eximbank's large infrastructure export credits are at floating rates based on LIBOR plus a margin of 100 to 300 basis points (1 to 3 percent) or even higher. They usually need to be repaid over a period of 13 to 17 years. There is no indication that these large Chinese infrastructure loans are subsidized. So the loans that we guarantee can be cheaper than China Eximbank's export credits, or they can be more expensive. Or so it looks to me. But I'd be interested in how it looks to readers of this post.

Finally, I was pleased to see data in Hochberg's letter to show that U.S. Export-Import Bank support to projects in sub-Saharan Africa has gone up from an average of $455 million annually (FY2006-FY2009) to $800 million (FY2010), and $1.4 billion (FY2011). At this rate of growth, we may stand a chance of catching up to China Eximbank... which is probably putting in around $6 billion annually.